Wow! That’s expensive…

I get that a lot. If you’ve never hired contractors before, you may not be aware of the differences in how taxes are paid. Regular employee compensation includes a salary and benefits. Employees pay taxes on their salaries, but not on their benefits. Contractors pay taxes on all compensation. Also, there is a 15.3% self employment tax in addition to the normal income taxes. Contractors must charge higher rates to help deal with higher taxes, generally pushing federal income taxes to the 28% maximum. In addition, contractors must provide their own training and accounting – which is time spent working but not getting paid. A good general rule of thumb for contracting rates is to take an equivalent employee salary and divide by 1000 for an hourly rate. For example, to achieve approximately equal compensation with an employee on salary for $95,000 USD/year a contractor would need to charge $95/hour.

Here is a parametized Excel worksheet with 2009 tax calculations for both employees and contractors. It’s actually very conservative in favor of the employer, as it doesn’t account for state taxes or non-billable time.

Download Excel Worksheet